Peter Schiff On The Debt Ceiling Delusions

Submitted by Peter Schiff via Euro Pacific Capital,

The popular take on the current debt ceiling stand-off is that the Tea Party wing of the Republican Party has a delusional belief that it can hit the brakes on new debt creation without bringing on an economic catastrophe. While Republicans are indeed kidding themselves if they believe that their actions will not unleash deep economic turmoil, there are much deeper and more significant delusions on the other side of the aisle. Democrats, and the President in particular, believe that continually taking on more debt to pay existing debt is a more responsible course of action. Even worse, they appear to believe that debt accumulation is the equivalent of economic growth.

If Republicans were to inexplicably prevail, and the federal government were to cut spending so that its expenditures matched its tax revenues (a truly radical idea) the country's financial mess would be laid bare. The government would have to weigh the relative costs and benefits of making interest payments on Treasury debt (primarily to foreign creditors) or to trim entitlements promised to U.S. citizens. But those are choices we will have to make sooner or later anyway. In fact we should have dealt with these issues years ago. But generations of mechanistic debt ceiling increases have allowed us to perpetually kick the can down the road. What could possibly be gained by doing it again, particularly if it is done with no commitment to change course?

The Democrats' argument that America needs to pay its bills is just hollow rhetoric. Paying off one's Visa bill with a new and bigger MasterCard bill can't be considered a legitimate payment of debt. At best it is a transfer. But in the government's case, it doesn't even qualify as that. Treasury debt is primarily bought by the Fed, foreign central banks, and major financial institutions. None of that will change with a debt ceiling increase. We will just go to the same people for greater quantities. So it's like paying off your Visa card with a bigger Visa card.

According to modern economists, an elimination of deficit spending will immediately cause a dollar for dollar decrease in GDP. For example, if the government stopped sending food stamp payments to poor people, then grocery stores would lose business, employees would be laid off, and the economy would contract. But this one dimensional view fails to appreciate that the purchasing power of the food stamps had to come from somewhere. The government can't create something from nothing. Taxation transfers purchasing power from people living in the present to other people living in the present. In contrast, borrowing transfers purchasing power from people living in the future to people living in the present. The good news for politicians is that future people don't vote in current elections (and current voters don't seem to appreciate the cost to their future selves of current policy).

The Obama Administration has congratulated itself for turning around the contracting economy that it inherited from President Bush. But even if you take the obscenely low official inflation statistics at face value, we only grew at an anemic 1.075% annual pace from 2009 to 2012 (far below the between 3% and 4% that the U.S. averaged post World War II). Sadly, this growth pales in comparison to the accumulation of new debt that we are borrowing from the future.

U.S. GDP is measured at roughly $15 trillion per year. 2% growth means that each year the GDP is approximately $300 billion larger than the prior year. But in the less than five years since Obama took office, the federal government has added, on average, about $1.3 trillion per year in new debt, a pace that is four times higher than the growth. If the deficit were subtracted from GDP, America would be shown to be stuck in a severe recession that Washington can't acknowledge. But such a reality is more consistent with the dismal job prospects and stagnant incomes experienced by most Americans.

The belief that deficits add to the economy, and that debt can be dealt with in an imaginary future (that never seems to arrive) is the foundation upon which the President can chastise the Republicans as irresponsible suicide bombers. Using this logic, he can argue (with a straight face) that borrowing is the equivalent of paying. That the President can make this delusional argument is not so surprising (no lie too great for the typical politician to attempt). What is alarming is that the media and the public have swallowed it so willingly. As they call for limitless increases in borrowing, Democrats have offered no plan to reduce the current debt and they are unwilling to negotiate with Republicans on that topic. Yet somehow they have been perceived as the party of fiscal responsibility.

While the Republicans have a dismal track record of their own when it comes to budgetary management, it can't be disputed that the minor dip in that rate of increase in spending that resulted from the recent Sequester, happened only because they dug in on the issue. Without the 2011 debt ceiling drama, there is no chance that any spending would have been touched.

Democrats had warned that the $85 billion in sequestration cuts slated for fiscal year 2013 (about 2% of the Federal budget) would be sufficient to bring on economic Armageddon. But guess what? We survived. Recently, Senate Majority Leader Harry Reid continued with such rhetoric by declaring that there are no more cuts to be found anywhere in the $3.8 Trillion dollar federal budget. (Apparently he missed last week's 60 Minutes piece on the spreading epidemic of federal disability fraud.)

We have to acknowledge what even the Republicans haven't fully grasped. We are in such a deep debt hole that there is no solution that does not involve serious economic pain. Tea Party Republicans rightly believe that government spending is a drag on economic growth. As a result, they conclude that immediate spending cuts will help with the "recovery". But they are confusing real economic growth with the delusional expansion created by deficit spending (which is actually damaging the real economy). If they cut the deficit, this phony economy may likely implode and cause widespread distress.

So even though a reduction in government borrowing and spending does help the economy, it won't feel very helpful tomorrow. The more we borrow and spend today, the more we will suffer tomorrow when the bills come due. Ironically, cutting government spending now helps the economy by allowing the economic adjustment to happen sooner rather than later. But this type of long-term thinking is very difficult for politicians to consider.

Unfortunately our debts don't leave us much in the way of choices. We can choose to pay now or try to pay later. But the longer we wait the steeper the bill.

Comments

[ak_khanna]

It is clear from this shutdown that politicians in a democracy are willing to hold the future of the majority of the working class at stake to achieve their own objectives. If the population of a country thinks that political candidates who spend millions of dollars to get elected do so to serve their country and make policies and rules for the betterment of the majority of the citizens of the country need to wake up from their dreams. Democracy worldwide is a failure and needs to be re-defined to ensure the periodical evaluation of elected leaders so that they perform their duties or can be removed by the people from their seats of power.

llusion of Democracy today.

People sponsored by the rich, make false promises to the masses to get elected. Distribute national wealth amongst themselves and their sponsors (Industrialists) and when that is not enough borrow money from rest of the world and continue the distribution process. The borrowed money has to be paid back by taxing the masses keeping in mind that tax rules are made such that the politicians and their sponsors pay minimum or no taxes.

End of political tenure, rinse and repeat till the whole system breaks down and the world wealth is cornered by a minuscule of the population.

http://www.marketoracle.co.uk/Article40231.html

[Radical Marijuana]

Hah! How appropriate ak_khanna, that you "rinsed and repeated" your comment!

To make democracy become more real, the people would have to stop being such Zombie Sheeple, who are brainwashed too well to believe in bullshit. They would have to become competent citizens that understood and operated their actual money/murder systems. Instead of being consumers of bullshit, they would have to take active interest in understand that their citizenship really means that they are members of an organized crime gang, and that they should act like better wolves in that context, rather than continue to act like brain dead sheep. However, instead, almost everyone who does a good analysis of what is wrong then collapses back to the same old bullshit of false fundamental dichotomies and impossible ideals, when they propose solutions. Almost all of the controlled opposition to the established systems are various kinds of Black Sheep, who advocate that everyone should become better sheep, as the way to solve the problems.

Money is measurement backed by murder, where the debt controls depend on the death controls. Those real systems now work by having the best organized gangs of criminals, the international banksters, effectively able to apply the methods of organized crime, in order to control the government, to legalize the lies which benefit those banksters. The alleged opposition to that system is almost totally made up of different kinds of reactionary revolutionaries, who variously assert that there should not be any murder systems, or no consciously operated death controls, as the ways to have ideal solutions, which are axiomatically impossible non-starters. Democracy is already practically dead due to the degree to which the entire system, of the Vicious Wolves, the Domesticated Dogs, and the Black Sheeple, and the Zombie Sheeple, ALL operate within the same reference of bullshit, i.e., false fundamental dichotomies, and related impossible ideals.

The only way that democracy could work is if there was a successful and sustainable democratization of the death controls. Upon the basis that the murder system was democratically understood and maintained, then their could be a democratic monetary system built and operated. However, that would be almost totally opposite to the way that those things are now being done, through the maximum possible deceits and frauds, which includes how the controlled opposition to the established systems continue to agree to operate within the same frame of reference of those deceits and frauds. We have almost totally fake democracy, which is actually a fascist plutocracy. To have a real democracy, it must do what the fascist plutocracy actually does, in ways that are done better, not idealized impossible ways in which nothing like that is done whatsoever!

The greatest illusion of about a "free and democratic" society is that there does not have to be any death controls done through that system. Since money is measurement backed by murder, the best murderers have taken control over the money system, namely the international banksters. Democracy could not work unless enough citizens were competent to act as effective members of an organized crime gang. Clearly, that degree of breakthrough to more radical truth is a fringe cubed position now, and therefore, the continuing death rattle of democracy is the only realistic thing to expect, with horrible changes of state, by debt insanity leading to death insanities, being the most probable real futures.

As long as those calling for more "democracy" are not calling for better systems of death control, then they are saying nothing with content. To talk about ideal "truth and justice" will continue to backfire badly, since impossible ideals always make the opposite happen in the real world. An actually better organized combined money/murder system is necessary both in the short-term, to ever effectively resist the banksters, as well as in the longer term, to maintain better overall real human ecologies and industrial ecologies, within the natural ecologies.

[epwpixieq-1]

"We can choose to pay now or try to pay later." - Regrettably Peter is wrong here.

A simple dilemma: You were about to be killed and had been given a choice, to die today or to die tomorrow, from even more horrible ( unspecified ) death, what would you choose?

Ones you are on the path of involvedly (however it is defined), there is no choice anymore (regrettably I would add), only delaying, everything is (political) self preservation. So the financial discipline will not evolve within the US of A, but, sooner or later, imposed from outside by the other nations abandoning the dollar. The more US of A pushes with its financial irresponsibility the faster this moment comes, and although the tipping point has not come yet, the processes has started several years back, and now it is just matter of time for it to run its course.